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The Problem of Phantom Bidding

Let’s be honest, not all real estate agents exercise the best moral judgment when conducting business. Greed is a powerful motivator for deception, and it’s easy to see how some would want to take advantage of the skyrocketing house prices in Toronto by jacking up the price ever so slightly.

Homebuyers have been suspicious of this practice – real estate agents making up phony bids and masking it as part of a greater bidding war to drive up the price of a home – for a long time. But unfortunately, such a fraudulent practice is one that is difficult to prove, when one considers that a formal bid for a home need not be in writing. Garry Marr of The Financial Post offers a great example of how a “phantom bid” typically goes down:

The scam involves a sales agent hinting to prospective buyers there are other bids as a way to coax them to bid higher. “You say, ‘We’re expecting another offer. I do have another offer. You may want to go back to your client and make sure this is their best offer’,” says said Joseph Richer, registrar of RECO. “You are suggesting there might be competing offers when there may or may not be.”

As Alexandra Posadzki of The Canadian Press explains, as of July 1, agents will not be allowed to imply they have received an offer unless it is in writing and has been signed. They will also be required to keep records of all of the offers they have received on file for one year. Buyers who suspect that there is foul play a foot can file a complaint and a request for information with the Real Estate Council of Ontario. Carolyn Ireland of The Globe and Mail raises an important appoint, stating that the new rules are intended to protect the consumer, helping to take out some of the stress associated with entering a bidding war.

In terms of the logistics for brokerages the new law will require them to keep an offer, or an equivalent summary (a list of buyers and contact info with name of broker, date and time), on record for one year. A broker who fails to follow the rules could be prosecuted and face a maximum fine of $50,000 or up to two years behind bars. Alternatively, the agent could be referred to a disciplinary committee and be ordered to take educational courses or pay up to $25,000 in fines.

There’s at least one critic of the laws making his opinion known in the media. Real estate lawyer Lawrence Dale, a founder of discount broker Realtysellers, doesn’t believe the law will do anything to deter agents from abusing the system and scamming potential buyers, arguing that they’ll simply find a way around it. In addition to that, Dale believes the new complaint system being introduced could be abused by buyers suffering from remorse from paying too high an asking price for their new home.

The “Places to Grow” Mandate and the Condo Market in Toronto

About a decade ago, the Ontario government launched an initiative that has since had an incredible impact on the real estate industry in Toronto and across the province, called Places to Grow. According to the official government website dedicated to this strategy, the idea behind it is to support development that promotes “economic prosperity, protects the environment and helps communities achieve a high quality of life across the province.”

The goal is to protect agricultural lands in the province (and GTA in particular) from encroaching urban sprawl, effectively creating a “Green Belt,” limiting where new subdivisions could be built.

The execution of this program the past few years has resembled region-specific plans that are meant to guide policy decisions within that region. Toronto, for example, has adopted a strategy that involves “growing up, not out,” spurring the unprecedented growth of condominiums in the GTA, particularly high-end, luxury condominiums.

According to Judy Hazan of the Epoch Times, back in the year 2000, Toronto’s luxury condominium market was practically non-existent. Hazan spoke to three upper level executives at Baker Real Estate based in Toronto, and they argue that One Post Road on Toronto’s Bridal Path changed everything. President and CEO of Baker Real Estate, Barbara Lawlor, had this to say:

“One Post Road was a leader in luxury living—there was so little luxury in our city—One Post road really captured the imagination. It was the beginning of the luxury market in Toronto. Today, we have five 5-star hotels with residences atop and we have other really glorious buildings like One Bloor and The Ritz Carlton, so the luxury market has really grown.”

The “grow up, not out” philosophy behind Toronto’s regional growth plan has resulted, in general, in the development of far more condo towers, which ultimately translates into less and less space for low-rise homes, which is undoubtedly a factor in the escalating prices of such homes in the city. Despite the growth in the high-end condo market, the relative price difference between a condo and a detached/semi-detached home make condos the more affordable option for first-time buyers. In today’s economy and real estate market, it has become exceedingly difficult for first-time home purchases to be houses; condos are now the starter property of choice for those who want to buy instead of rent.

According to Ryan Starr of The Toronto Star, the impact Places to Grow has had on lowrise development, has been substantial, but seldom talked about. The creation of a Green Belt has led to astronomical increases in the price of land that is left behind for lowrise development to occur, which leads to higher home prices. What some real estate development companies are doing, as opposed to building on expensive land, are moving even further out, beyond the Green Belt, in an attempt to lure would-be homebuyers out of the city where prices are far more affordable, into areas such as Brantford, for example.

Canada is the “New Switzerland”

It’s no secret that, internationally, Canada has developed a reputation as being a safe country to live in. But it appears, as of late, that the city of Toronto has developed its own reputation abroad, for being a place where those interested in making money buying and selling real estate, have a very good shot at striking rich. This reputation has become so pronounced that some are attributing it to the recent housing boom (the escalating surge in home prices coupled with moderate sales growth) in the city.

According to Katia Dmetrieva and Jeremy van Loon of Bloomberg News (published in The Globe and Mail), the city of Toronto alone attracts about a quarter of the 250,000 immigrants that arrive in Canada each year. Property Developer Sam Mizrahi of Mizrahi Developments, said at the Bloomberg Economic Series Canada summit in Toronto recently, that this wave of immigration every year is what’s primarily driving the demand for housing.

“Immigration keeps the market buoyant….Canada’s seen as the new Switzerland.”

In regards to Toronto’s ever increasing house prices, Mizrahi was quoted as saying that “Prices will continue to increase only if immigration continues.”

At the same Bloomberg event, Jennifer Keesmaat, chief planner at the City of Toronto, was quoted as saying:

“Many cities would scream for the kind of growth we have in Toronto. We went through a phase where we were seeking to bring people to the downtown core—that has now been accompanied by an incredible increase in employment.”

This insight into the Toronto real estate market has been known to many agents working out in the field for a long time. Back in September of 2014, Mark McAllister of Global News, commented on the notion that “catering to different cultures and backgrounds has become big business for the real estate industry in the Greater Toronto Area,” noting that a third of all new homes are bought people from the Chinese and South Asian communities, according to the company behind a couple of websites aimed at that market (according to mychinesehome.ca and mysouthasianhome.ca). Ethnic enclaves are a key feature of Toronto’s economic landscape, with the city drawing in people from all over the world, who in turn, settle into distinct communities across the city, such as Little Portugal, China Town, Little Italy and Greek town to name a few. Almost half of Torontonians were born outside Canada, making it one of the most diverse cities in the world, according to the municipality’s website. Chinese speakers are the most numerous among recent immigrants, followed by Italian, Punjabi and Tagalog speakers.

The argument and logic behind why immigrants are driving the demand for housing in Toronto is simple: individuals and families who are looking to relocate and start their lives over in Canada and Toronto, are not looking to do so on a temporary basis. Immigrant families in particular want to establish a foundation, and set up roots in the city. This, among many other factors, is what makes immigrants and international students so eager to buy homes.

Tips for Buying a Home at Auction

When it comes to the average resale price of a home in Toronto, it’s increasingly difficult to ignore the overwhelming evidence to suggest that home prices are escalating rapidly in the nation’s busiest and most populated metropolis. The real estate market in the GTA has been big news as of late, making headlines in February, when the average resale price of a detached home in Toronto eclipsed the $1 million mark, and again in March, when house prices overall went up an additional 10% from the previous year. Many analysts are skeptical, arguing that such a trend has no foreseeable signs of slowing down, attributing these price gains to increased demand and competition in the market, with many new potential homebuyers entering the market that has a depleted housing supply. The only units in the GTA that are abundant are condominiums, but if you are looking for a home, many have to prepare for the bidding war that will inevitably ensue. It’s these bidding wars that many believe, is what’s causing prices to balloon at an accelerated rate.

The new trend now, especially in the luxury housing market, has been to completely embrace the bidding war, and transform the sale of the home into an auction. If such a strategy is successful at selling homes that cost millions of dollars, it may be only a matter of time before such a strategy is adopted by the average home seller. It does have some benefits, pitting wannabe homeowners directly with one another, in a forum that is bound to see prices go well above asking. Plus, the seller gets the peace of mind of knowing that his or her home will definitely be sold.

In preparation for this possible future, we thought it might be prudent to offer a few tips on how to purchase a home at auction.

The first, and arguably most important tip, is to do your homework. You want to know every last detail of the home you are thinking of purchasing, and if possible, have someone conduct a thorough assessment of the home to point out any areas that may need improvement or immediate renovation. You also want to be familiarized with the ins and outs of the auction process. Contact the auctioneer or the attorney handling the home, find out how much money you’ll need to have as a down payment. Also, some auction companies will require you to bring a certified cheque in the amount of a few thousand dollars, in order for you to demonstrate legitimate intent.

In the same vein, you also want to do some research on the area the home you’re considering buying is located. Find out how much other homes in the area have sold for, which can be done using websites like Zoocasa and Zillow, and determine what a fair selling price for the home might be, and gauge how much you’re willing to spend from there.

Another useful tip, once the auction process has begun, is to keenly observe the other bidders. It is sometimes very easy to get lost in the theatrics of the event, and to get sucked in to the bidding after the price has gone far beyond what you expected to spend, simply for the thrill of participating, and the chance of winning.

The Cause of the Growing Price Gap Between Toronto Homes and Condos

A number of documents and reports related to the real estate market in Toronto and in other major metropolises across Canada, has raised the attention of many market analysts. The first of many highly publicized revelations was discussed in a previous article, related to the average resale price of a detached home in Toronto reaching the $1 million mark (figures gathered and published by the Toronto Real Estate Board). Now, the focus appears to have shifted to another metrics, that being, the gap between the average sale price of a condominium, versus that of a single-family home.

Spoiler alert, the gap is widening.

Tamsin McMahon of The Globe and Mail tracks the discrepancy in prices between detached homes in condos from the end of 2014 in Canada’s major housing markets: Toronto, Calgary, Vancouver and Montreal.

In December, 2014, the average price gap between a condo and a single-family house in the resale market for all four cities hit $320,000, according to Brookfield RPS. The discrepancy is starkest in Vancouver, where the average resale house price has shot up 120% since 2005 to $1.1 million, while condo prices have risen by 50%. The difference in price between low- and high-rise homes stood at a record high of $251,337 in 2014, said a strategic review of the Greater Toronto Area’s (GTA) new home market, according to a review conducted by RealNet Canada and the Building Industry and Land Development Association (BILD). For the purposes of low-rise homes include townhouses and detached properties, while high-rises include lofts and condominiums. The sale of low-rise home sales increased by 46% from 2013 to 17,745 units, with high-rises increasing by 40% to 21,991 homes sold in total.

The average price of a low-rise home in Toronto reached $705,813 in 2014, up 8% from the year before, while the average price of a high-rise unit rose just 4% to $454,476. The gap between condos and houses grew 16% in December compared to a year earlier, hitting a record of more than $251,000. (Low-rise homes consist of houses, including detached and semi-detached houses, townhomes and link homes, while high-rises encompass all condos and lofts.)

Tamsin calls the cause of the gap “predictable,” citing a severe decline in the supply of new listings for urban houses for several years (backed by Shaun Hildebrand). This has been driven partly by a lack of newly built homes in urban centres and also by the fact that existing homeowners have been hesitant to sell in case there’s nothing to buy. Couple this with an unprecedented number of new condo developments, in a politically mandated push to increase population density in major downtown cores across the country.

McMahon adds:

“The growing price divide comes as developers have been under pressure to shrink the size of new condo units to keep costs down, while an insatiable appetite for houses, coupled with a shortage of supply, has driven up the cost of low-rise development.”

The Trend Towards Micro-Condos

There is a growing trend picking up steam in Canada that has its roots in places like Japan, and a few larger metropolises in Europe. It would appear that more and more people, looking to find a residence in a sprawling downtown core without having to pay downtown prices, are choosing to live in “micro-condos.” Such units already have a presence in Vancouver’s largest cities, like Surrey and Victoria. But an influx of these units are in there final stage of construction and development now, with potential buyers and renters expected to flock to these units by the summer. There are nearly 3,000 micro condo units under construction in Toronto that are slated to be completed this year, according to Shaun Hildebrand, vice president of condo research firm Urbanation.

According to Sandra Rinomato of Canada AM, the typical micro-condo unit is extremely small, ranging in size anywhere from 220-400 square feet. Alexandra Posadzki, refers to them as “shoebox condos,” comparing them to the size of two average living rooms, while Jason Proctor of CBC News describes them as the housing equivalents of Swiss army knives: “compact, brilliantly designed units that pack a seemingly unlimited cache of hidden space into 300 square feet.”

Furniture is designed to maximize on the available space, such as fold up beds (which are standard issue in the units), with storage space often hidden away. Make no mistakes, these units are minimalist spaces, intended to cater to a very specific kind of lifestyle. The big trade off potential home buyers and new condo renters are willing to make involves trading personal space for communal space.

Opinions regarding these types of units vary, with some real estate analysts and observers pointing out some obvious flaws. For example, Rinomato argues that having only a few items out of place could force the entire unit to look cramped, making the space seem more confining. However, she also suggests that micro-condos make attractive sale units for real estate agents because they typically rent for more money per square foot than their larger counterparts. Hildebrand says condos under 500 square feet can bring in well over $3 per square foot, while the rest of the market averages around $2.50 or $2.60.

Securing the financing needed to purchase one of these micro-units can be exceedingly difficult, considering most banks and lenders have minimum square footage requirements. The concern being, that investors will sell off the properties in droves if the housing market starts to decline. This particular point seems ironic, considering that many investors are touting these units as being an excellent entry point into the market for young professionals. “There are minimum square-footage guidelines that vary market to market, but the most important factor is the condo’s marketability,” according to CIBC spokeswoman Caroline Van Hasselt. The true issue at heart has to do with demand uncertainty. Because these types of units are so new, no one can truly accurately predict how well they will sell in Canada’s major cities.

Examining the Connection Between Oil and Housing Prices

The dropping price of oil, and its effect on the Canadian housing market, was a topic touched upon in the last article published on January 27, entitled, The Two Factors That Will Decide Toronto’s Housing Market in 2015. But, we here at iHomes thought it necessary to explore the topic in more detail. To offer up more than just a quick overview of the effect a decline in oil prices may have on resale housing prices, and instead, examine some of the theories offered up by financial analysts and economists on the connection between oil and real estate.

A lot of attention is being paid online to a recent Royal LePage house price survey and market forecast, which they publish annually, released on January 14. Susan Pigg of The Toronto Star, offers up her synopsis of this report. Initially, LePage predicted housing price increases average 2.9% across Canada, moving the average price of a home to $419,318, up from $407,500 last year. The report highlighted Toronto specifically, predicting that the GTA would experience the highest percentage growth in housing prices compared to 2014, with an expected increase of 4.5%, bringing the average resale price of condos and houses combined across the GTA to $592,000 — up from $566,500 in 2014 and $524,089 in 2013.

Royal LePage would later revise its forecasts, having to account for the deepening slide of oil prices. According to Royal LePage chief executive officer Phil Soper:

“In the immediate term we anticipate that the natural slowing of home price appreciation we called for in the third quarter of 2014 will be delayed in Central Canada and accelerated in the West by recent developments in the energy sector.”

But why is Western and Central Canada more susceptible to declining house prices resulting the declining value of crude? Chris Matthews of Fortune, has one possible answer, making the argument that if declining oil prices are expected in the long term, we can also expect to see home values “in markets with a high concentration of energy sector jobs,” also to decline. Referring to historical trends in the U.S. housing market, Matthews quotes Trulia Chief Economist Jed Kolko, who contends that oil price drops have historically been associated with job losses and falling home prices in energy-producing regions. The chain reaction that Matthews and Kolko are alluding to is not one that is difficult to decipher. Those working in regions that are heavily dependent on the oil industry, face a greater risk of losing their jobs when labour costs need to be cut in order to compensate for the declining value of oil. Fewer employed adults means fewer potential homebuyers, leading to declines in the price of homes in order to draw in buyers who may be on the fence. Michael Babad of The Globe and Mail, suggests that such changes are already taking place in Alberta, causing both job cuts and major project delays.

It isn’t all bad news when it comes to slumping oil value. Soper noted that dropping oil prices make it far less likely that interest rates will rise, which will benefit homebuyers nationally. Babad claims that potential homebuyers in Ontario stand to gain from oil price decline, getting to enjoy the subsequent depreciation of the Canadian Dollar.

How Dependent is Canada’s Housing Market on Foreign Investment?

The question regarding Canada’s dependency on foreign investment in the housing market, is raised consistently by market analysts, but unfortunately, is not one that can be answered definitively.

Interestingly enough, Canada, unlike countries such as the U.S. and Australia, does not collect data on foreign investment, leaving market observers and analysts to speculate on the amount of foreign investment the country’s housing market is experiencing. The majority evidence that exists is anecdotal, coming from real estate agents and brokers who can speak first-hand on the number of sales they’ve made to foreign buyers. A handful or privately funded reports also exist, some of which will be highlighted in this article.

Al Daimee, a real estate agent with Royal LePage who specializes in downtown Toronto condo sales, stated in an interview with Hopkins and French, “There is definitely a foreign investment component to the new condo industry – it makes up the vast majority of sales right now.” The evidence he uses to substantiate his claim is the presence of a power of attorney on condo documents, a practice typically used by foreign investors. According to Andrea Hopkins and Cameron French of The Globe and Mail. Canada (along with Australia, who are experiencing similar housing market conditions) is attractive to global real estate investors “seeking a safe and stable place to park their money,” given as how Canada was able to avoid a full on housing collapse during the global economic crisis.

Just to get a sense of the amount of foreign investment Canada could be experiencing as a whole, a report released by the U.S. National Association of Realtors stated that, Chinese investors spent $22 billion on American real estate in 2013, and $17.2 billion on Australian real estate, with Canada likely being a close third. In April 2013, Sotheby’s released its Top Tier Trend Report, which found that foreign investment had a prominent foothold in the luxury market in particular. It suggests that half of Montreal’s luxury homes are foreign purchased, along with Vancouver’s 40%, and Toronto’s 25%.

Some, like Sunny Freeman of The Huffington Post, suggest that foreign investment from China is a result of Canada’s housing prices being inflated, which is discouraging to many domestic buyers, but appealing to wealthy foreign investors. News of Canada’s deteriorating home affordability coupled with low interest rates that spread internationally back in mid-2012, is believed, to have been the spark causing a rush of Chinese investment into the country. Is there a consequence to all this foreign investment? There is no clear consensus on this topics, but some suggest that it may drive up demand and inflate prices further. Freeman explores it well from both angles, arguing that, on the one hand, governments, realtors and developers should be welcoming of wealthy foreign investors because they provide a stable flow of money and competition that raises valuations. While on the other hand, economists, city planners and community activists do not necessarily view foreign owners as being invested in the community, and so, are most likely to pull out of the market quickly in the case of a downturn.

Toronto’s Real Estate Market in 2014: A Year in Review – Part 2

Move Smartly points out that the Toronto housing market was particularly competitive during the first four months of 2014, which they attribute to two factors: A steep decline in inventory from Q4 2013 that lead to a shortage of homes available for sale, coupled with a strong demand for houses at the time, which Move Smartly believes, is also a carry-over from the year before. The review illustrates that the competition for homes was specific to semi-detached and attached row houses, which had begun to significantly decline in inventory since September, 2013.

Both average sale price, and overall sales records were broken during the month of May. The Toronto Real Estate reported that 11,070 existing homes were sold that month, representing an 11.4% hike in sales from a year before, with the average sale price increasing over that same year long period by 8.4%, to $585,204. Not to be outdone in the record-breaking department was Calgary, which continued its impressive growth with another 2,948 homes sold in May alone, a new record for the month. The median and average MLS sale price in Calgary also reached record highs of $435,000 and $486,531 respectively.

The latter part of the year did not see the escalation of average sale prices for homes across Canada, or in Toronto in particular, slow down. A study published by Desjardins in early November stated the average price of a home in Canada had increased faster than income growth in Q3, with prices up 5.3% when compared to a year before. Desjardins’ “Affordability Index” is calculated by using the ratio between average household income and income needed to get a mortgage on an average-priced home. And according to their metric, the Canadian housing market is, on average, the least affordable it has been in the past 25 years. Toronto is not the least affordable housing market in the country, according to their study, with Vancouver taking the crown, boasting an average home price of $820,753. Windsor, Ontario, not surprisingly, is still the country’s most affordable city to buy a home, with the average price sitting at $568,384.

Housing affordability continued to decline right up until mid-December, with a published statement from the Bank of Canada, claiming that they believe the real estate market is overvalued by as much as 30%. The average price for a new construction low-rise home in the GTA, according to Bryan Tuckey of The Toronto Star reached $700,779, another record high. Tuckey accounts by examining supply and demand factors linked to population growth, arguing that the increase in units under construction, as well as average sales price, are a direct result of the intensification objectives outlined in the provincial growth plan, Places to Grow, aimed at increasing population density in urban centres and along transit corridors.

Toronto’s Real Estate Market in 2014: A Year in Review – Part 1

The old saying is that you can see where you’re going by looking back at where you came from.

If that logic holds true, we will be in a good position to predict the performance of the Toronto real estate market in 2015, by examining what happened in the year that just passed.

The first big trend of 2014 was that the construction was rampant, in many major Canadian markets, throughout the year. Back on January 22, a report published by Emporis suggested that four of the five top cities in North America for high-rise construction were Canadian: Toronto, Montreal, Vancouver, Calgary. Information released by Statistics Canada (read the article written by Greg Quinn and published on the Financial Post website revealed an interesting trend in housing permits issued in July, in Toronto and Vancouver specifically, that exceeded expectations. The value of municipal permits for multi-unit housing increased to 43.4%, to approximately $2.54 Billion, with the total permits in Toronto increasing by 29.6% to $1.65 Billion. A review conducted by Move Smartly, a record number of “condo completions” (new condo constructions) was achieved in 2014, with Realnet reporting 19,722 new completions from Q1 to Q3 alone, surpassing the previous annual record of 16,668 set in 2013.

The flooding of the Toronto market with newly built condominiums was so pronounced, it forced the Canada Mortgage and Housing Corporation to withdraw their offering of mortgage loan insurance for the financing of multi-unit condominium construction (read the full CMHC article). The decision did not affect individuals looking to purchase a condo, whose insurance for mortgage loans remained unchanged. The move was made as a result of blatant lack of demand, with no insurance of its kind issued since 2011, citing competition with private firms, such as MCAP.

Condo sales, thankfully, set new records in the GTA, offsetting some of the massive inventory build-up taking place. George Carras of The Toronto Star posted back on August 2 that condo sales in the GTA increased by 33% compared to a year prior, with 37 new high-rise projects under development totalling 7,588 new units. Over 70% of these units are being built within the Toronto boundaries, another record high for development within the region relative to its neighbouring municipalities.

For the year as a whole, 2014 also saw the affordability of homes plummet, as the average price of a single-family home rose significantly in every major market across the country. Back in February, a report issued by TD Economics that made its way around the internet, stated that Canadian homes were overvalued by 10%, a figure supported by research financed by the International Monetary Fund. The Financial Post noted that the report compared the income and rents of Canada’s major markets to other “advanced economies,” and found that as home prices remain high, even as home sales have stalled.